Return of Winter Catches Natural Gas Bears Off Guard
After months of trading in a tight range between $2.75 and $3.10 per MMBtu, natural gas prices started to rise in late December with that momentum carrying into 2018. On January 23, natural gas prices hit an intra-day high of $3.62.
After two historically warn winters, a bout of exceptionally cold weather sent U.S. naturally gas prices considerably higher from their December lows near $2.65. Natural gas accounts for around 30% of residential usage in the winter versus just five percent in the summer.
The deep freeze also boosted beleaguered natural gas prices in Canada. Between Christmas and New Year, AECO, Alberta’s natural gas price benchmark, soared 72% from $2.50 per thousand cubic feet to $4.30.
Sustained cold weather and rising natural gas prices helped lift natural gas stocks. After trading sideways for months, BHP Billiton Limited’s (NYSE:BHP) share price got a lift in early December and, as of the end of January, 2018, it has advanced more than 22%. Over the same period of time, Phillips 66’s (NYSE:PSX) share price has increased nearly eight percent.
Admittedly, it is going to take a lot of cold weather to put a dent in storage levels and increase natural gas prices for the first half of the year. As we get closer to the summer months, investors, hedge funds, and other managers could become increasingly bearish.
There might be more reason to be bearish on natural gas prices over the long-term. According to the U.S. Department of Energy, natural gas production is expected to exceed consumption over the next two years.1
That has not happened in more than half a century and it should drive down natural gas prices. But there are many, many unexpected and unforeseen events that could propel natural gas prices higher. The key is learning how to read the markets.
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- “EIA expects 2018 and 2019 natural gas prices to remain relatively flat,” U.S. Energy Information Administration, January 25, 2018; https://www.eia.gov/todayinenergy/detail.php?id=34672
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